UC3M

INTERNATIONAL
ECONOMICS
PROBLEM SET 1

INSTRUCTIONS: This problem set is due in your following reduced class.

1. i) How the relative importance of the foreign sector is usually measured in most countries? ii)
Surprisingly enough, the relative size of the foreign sector is bigger in Belgium than in Japan or USA.
Could you explain this fact? iii) Could the relative size of exports (with respect to GDP) can be
higher than 100 %? iv) In most regions the transportation costs as percentage of the total cost has
been dropping, but this has not been the case in the developing Asia (which includes China, India
and Indonesia). Could you explain this surprising fact?
R= i) The relative importance of the external sector is usually measured in most countries by calculating
the coefficient of external openness, which helps us to know how much the economies are
internationalized. ii)This is because most large economies such as Japan or the United States are more
dedicated to domestic market production compared to smaller economies such as Belgium that seek to
be more competitive internationally through specialization. iii) If it can be more than 100% because it
happens that small economies export more than they produce or import more than they export. iv) I
attribute this phenomenon to trade restrictions that have been imposed by the United States and
other countries on the Asian region. I also think that there may be a shortage of ships or containers to
meet the demand for these which increases the total operating costs. Other possibility is that is
because China is more close economy.

2. Canada and South Korea have a similar population and GDP. Nevertheless, they differ in their
pattern of trade: Canada trades mostly with US, while 60 % of the Korean trade is divided
among China, Japan, the US and ASEAN (Association of Southeast Asian Nations). Can the
gravity model explain these differences?
R= i) I believe that gravity models can explain the differences between changing patterns giving an
intuitive visual approach to know the evolution of the country economically and how it depended on
trade deals with other countries over time. I also see the differences in the countries that each one
deals with because the closer the countries you do business with the better the costs, although clearly
the size of the economies you do business with also plays a role and I think the gravity model can
explain this the answer of this is clearly de distance with the countries pattern of trade.
3. Consider the gravity model where: Tij = AY aY b/Di,j. Using this equation, can we deduct that if
the GDP of countries i and j doubles, then the trade between them will also cuadruple?
R= In the gravity model, GDP growth is proportional to the value of the deal it generates, so if the GDP
of these countries doubled, it would quadruple.
4. A century ago most British imports came for relatively distant locations: Latin America, Asia and
North America. Today, most British imports come from European countries. Is this fact supported
by the Gravity model?
R= Yes, because in the gravity model it is very much implied that one of its variants, which is the
division of the formula, is the distance between the countries with which you do business and
therefore the size of the economy of that country. The key is the distance between this countries and
this model explain that.
5. East Asian countries have increased their share of world trade, and also inter-asian trade has
 grown as a share of world trade. Explain this fact using the gravity model.
R= This is explained very well with the gravity model because due to these alliances that the Asian
countries are making in their region lately it is empowering them more and more and making them
grow. They are focusing on making deals with the closest countries and thus growing their GDP
together which explains well the part of the gravity model that is calculated and explained with these
variants. They have been focusing more on exploiting and empowering the region where they are
located and leaving a little bit in the background the focus on making deals with more distant powers.
6. Read Alan Blinder´s article: Offshoring: The Next Industrial Revolution? How will offshoring affect the
pattern of world trade? Will this changes benefit equally to all countries? (You can find the article in
the Reading Material folder).
R= Offshoring will greatly affect world trade but as the article mentions there will not be a massive
elimination of jobs but there will be a massive transition. It will affect the ways in which countries make
deals, the approach to jobs (whether they are personal and impersonal), the importance of services,
the way education is provided, the way labor is paid, the allocation of resources to which economic
sectors, and so on. Actually, as the article mentions, it will be a fourth industrial revolution that will
change the way things are done, but we should not worry about it, we should know that economic,
commercial, cultural and social changes will have to be made.
On the other hand, it will not affect all countries in the same way due to the focus or the amount of
personal and impersonal services you have more focused on each country. Of course, the impact will
not be the same for a rich country as for a poor one, although they will all be affected.

8x-y=8
x-1/8=1/2

x=15/14
y=4